UPDATE 4-California city goes bust amid claim of false accounting

* Concerns that California could face wave of local
bankruptcies

* San Bernardino third California city to declare bankruptcy

* City's revenue fell as housing market collapsed

By Jim Christie

SAN FRANCISCO, July 11 (Reuters) - Officials in San
Bernardino, California, scrambled on Wednesday to explain the
city's surprise decision to seek bankruptcy protection, with the
city attorney backing away from his suggestion that fraudulent
accounting may have contributed to the city's problems.

At a late afternoon news conference, City Attorney James
Penman, who the day before had told the city council that
financial documents had been falsified for years, said: "I do
not know if there was criminal intent or not."

Penman added that "evidence of suggested wrongdoing" had
been turned over to unnamed government agencies. He declined to
elaborate on his comments to the city council.

Mayor Patrick Morris earlier told Reuters that Tuesday night
was the first time he had heard of falsified financial
information. He said there had been a recent instance in which
budget figures were not reconciled with audited financial
statements, but said that may have just been "sloppy budgeting
analysis."

San Bernardino's city council voted on Tuesday night to file
for bankruptcy, marking the third time in recent weeks a city in
California opted to seek protection from its creditors. The vote
followed a presentation by city staff which said the city would
be out of cash within weeks.

The staff report said San Bernardino, a city of about
210,000 residents approximately 65 miles (104 km) east of Los
Angeles, faces a crushing budget deficit of $45 million, which
represents almost 38 percent of its general fund budget.

Unlike Stockton and Mammoth Lakes, the two other California
cities that filed for bankruptcy recently, San Bernardino had
given no advance indications its situation was dire. It is not
clear why the city had not proceeded with a state-mandated
mediation with creditors ahead of a move toward bankruptcy.

"The suddenness of San Bernardino's bankruptcy vote is
troubling when other options were available," Dick Larkin,
director of credit analysis at HJ Sims, said in a report.

Standard & Poor's Ratings Services downgraded San
Bernardino's bond rating on Wednesday to speculative grade from
investment grade and placed the rating on its CreditWatch with
negative implications for further downgrades.

The city's abrupt action renewed concerns that California
could face a tidal wave of local bankruptcies, but the state has
so far appeared unaffected by the financial problems of its
local cities.

A spokesman for California State Treasurer Bill Lockyer said
the bankruptcies will not affect the state as it prepares to
issue $10 billion in short-term debt in August.

Like Stockton, a city of almost 300,000 that filed for
bankruptcy protection in June, San Bernardino has seen revenues
plummet as a result of the housing meltdown. And like many
cities across California, San Bernardino is saddled with
expensive union contracts and public employee pension
obligations that were agreed upon in flush times and are
extraordinarily difficult to modify.

Home building boomed in Stockton and San Bernardino in the
early 2000s, boosting the budgets of the blue-collar cities. But
by the end of the decade both cities had some of the highest
foreclosure rates in the country, and property values and
property tax revenues were in a free-fall.

San Bernardino's general fund revenue peaked at $133 million
in 2008 and has been dropping since then. In the fiscal year
that ended in June, the city had just over $78 million in
general fund revenue.

Mammoth Lakes, a ski resort town of about 8,000 residents,
last week filed for bankruptcy due to a nearly $43 million legal
judgment against it.

By contrast, Stockton and San Bernardino see Chapter 9 as a
way to restructure budgets hammered by steep revenue losses
after their respective housing markets crashed.

San Bernardino had money problems but they seemed in hand.
"There was no reading the tea leaves on this one," Cohen said.

WORSE THAN MESSY BOOKKEEPING?

Bad record-keeping was a factor complicating Stockton's
attempts to keep its books in balance, said Marc Levinson, the
attorney representing the city in bankruptcy court, and it may
turn out that San Bernardino had similar problems - or worse.

"In Stockton we have the problem that the books and records
just weren't very good," Levinson said, noting that also was a
problem for Vallejo, California. He represented the former Navy
town during bankruptcy proceedings from 2008 to 2011.

A report on San Bernardino's budget and financial options to
the city council sheds no light on its bookkeeping issues but
does stress the city's expenses have outpaced its revenue.

Despite cutting about $10 million a year and 20 percent of
its workforce over the past four years, San Bernardino lacks the
cash to meet its contractual obligations, the report said.

To balance its books in recent years, San Bernardino has cut
positions, won pay concessions from its employees and imposed
new revenue measures. But that only partially offset falling
revenue, and the city now faces the end of agreements with its
employees to hold down salaries and benefits.

The report proposes San Bernardino cut more costs, consider
tax measures to put to voters and seek concessions from its
employee unions. That includes potentially asking them to pay
part the city's share of contributions to pension accounts.

The report also proposes a hiring freeze, cutting overtime
for firefighters, consolidating some services and public works
program and deferring equipment purchases.

Additionally, the report urges deferring funding for the
city's retiree health and workers' compensation programs,
improving revenue collection from fees, including fees for false
alarms for police services, leasing city property and looking
into using part-time or contract employees and sharing
firefighting services with neighboring communities.

The report makes no mention of the city's creditors.
According to its fiscal 2010 annual report, the city at the end
of that year had $131.8 million in outstanding tax allocation
bonds, $47.9 million in outstanding pension obligation bonds and
$12.4 million in outstanding lease revenue bonds.

San Bernardino residents were shocked at how their city's
bankruptcy plan unfolded. "How do you let it get this far? It's
unbelievable," said Victor Garza, a 47-year-old photographer and
resident of San Bernardino.

Municipal finance experts, meanwhile, said that even if
there is no big wave of bankruptcies in California, they won't
be surprised to see more.